CROSS COLLATERALISATION???

There are two states (very greedy) that I know of that look at cross colateralisataion (sp.?) as a way to get more money from you in stamp duty on the mortgage.

I will try to explain it the best I can:

QLD – if you buy a property using any other property as security (cross colat.) you have to pay the stamp duty (mortgage) on not just the loan for the property but also the loan facility on any other property that has been used for security. ie. We bought an IP and had to pay and extra $1500 in Mortgage Stamp duty as it was secured against our PPoR which had a loan facility of $300,000. We did not have that much outstanding on our PPoR as we have been paying it off very quickly, but as the loan facility was for that amount (in other words we could borrow that amount against our PPoR) we had to pay it.

WA also charge extra but you are only disadvantaged if you buy multiple properties in WA and the properties in other states are not worth huge amounts in comparison. It is a very lengthy discourse I know, but I hope it helps.

For info on QLD look at this link:

http://www.osr.qld.gov.au/taxes/duties/mortgage_multijurisdictional_faq.htm
(Look at the second FAQ)

For info on the WA tax look at this link

http://www.dtf.wa.gov.au/cms/osr_content.asp?id=268

or ring your mortgage broker.

‘Eat rich food, barbeque a yuppie’ [greedy]

if you cross collateralise eventually you will run out of or reach a lending limit.

you might be ok with one or two, but if you keep them more as single entities you should have greater bargaining power, more flexibility to sell in the advent of something going wrong.

if everythig is tied up with everything else, it gets very messy. And ultimately expensive

Elves

” a blind man may see what a sighted man may not”

I agree with elves and terry! However, i have rather cheap properties and I have heard that the banks may want me to CC them.

if that’s my only option then I will, but not if i can help it. however like you my chosen strategy is “Buy and Hold” .

“why it is not a good idea to Cross collateralise.”

If something happens, heaven forbid, the bank can take them both not just one, and also, no flexibility to dispose of one of them without tricky refinancing and maybe penalties.

I Cross-Coll most of my IPs, but maximum is 3. But every now and then when the property have enough equity to stand alone, I just inform my lender to do the revaluation of the property for itself to stand alone.

I am sure by set up LOC or the so called Master Account from you existing equity you can go to any bank to borrow money without just stick to one bank.

Kind regards

Chan Dollars
[Retire Young, Retire Rich] [strum]

Sis,

as far as I know we could use the LOC for the 20% deposits of the various IPs we intend to buy (to avoid Mortgage Lending Insurance) and to pay a downpayment if we need to do a quick purchase.
Let’s say we’ve got $100,000.- LOC and the IPs cost $100,000.- each.
$20,000.- deposit for each IP. Then finding another loan for the balance of $80,000.- using the security of the IP.

Correct me if I’m wrong.

Prop16

As noted by other replies, offering multiple properties as security for an overall loan limit, locks borrower into one lender.

Selling properties under such a arrangement would entail the lender revaluing all proposed remaining securities (unless valuations had been done recently), to acertain the residual total value, and the total loan limit adjusted according to total residual value. This appears to be a fairly rigid negotiation senario with lender, and not wonderfully flexible and simple loan packaging lenders may claim.

A LOC is really just like any other loan as far as securities apply, it may or may not have multiple securities to support the loan limit. Portfolio loans (LOC) employ multiple securities/collateralisation feature.

A possibly better option is to establish a LOC for investment against one security such as PPOR. Then investor can draw funds from this LOC as cash deposits for purchase of IP’s that are independantly securitised with most suitable lender.

A downside to this strategy, is until the LOC is fully drawn in purchasing income earning assets, the undrawn amount is reducing more significantly, your total loan servicability, ie; LOC is just another liability where lenders include repayments required to service the maximum drawings. To minimise the loan serviceability problem, you can incrementally increase you LOC limit before each proposed asset purchase.

James

The previous issue of API magazine explain fully of how to set up LOC / Master Account.

Example:
PPOR current value = $300k, current loan = $100k
Maximum equity = $200k

Available Equity = ($300k x 0. – $100k = $140k

Set up Master Account = $100k

Buy IP1 = $100k, loan = $80k and use $20k from master account

Available in Master Account = $80k

Buy IP2 = $200k, loan = $160k and use $40k from master account.

Available in Master Account = $40k
.
.
.

Kind regards

Chan Dollars
[Retire Young, Retire Rich] [strum]

Celivia,
I think there is one catch tho…the interest on LOC will be higher comparing to the normal structure where you do cross-coll.

Kind regards

Chan Dollars
[Retire Young, Retire Rich] [strum]

True, but I don’t think the interest rate is that much higher. 6.6% I pay at the moment.
But the idea is to keep topping it up, and refinance IP asap to add back into LOC.
I’ll have a think about it though, thanks for your warning/opinions.